Six months after Argentina exited default, its new bonds have sunk to a mere 30 cents on the dollar.
The depressed price is, in fairness, partly the result of the basic mechanics of the securities – they carry artificially low interest rates and a generous grace period – but it also reflects a grim reality that’s setting in on creditors: The IMF deal that the country desperately needs is a long ways off.
Without that accord, and the fresh capital it could bring, Argentina’s pandemic-ravaged economy will remain listless and its finances so precarious that a default – the country’s fourth of this century – becomes all but inevitable when the bonds start coming due. At today’s prices, the bonds yield more than 1,500 basis points, or 15 percentage points, above US Treasuries.
“Argentina is in a real mess,” said Chris Marsh, a former IMF economist who’s now a senior adviser at Exante Data in London. “They just restructured their debt, and yet the reality is they can’t afford to service it.”
As forgiving as the terms in that deal were, there still wasn’t enough debt forgiveness, given how bad the economy was rocked by the pandemic, Marsh said.
Following that accord, the leftist government of President Alberto Fernández began negotiations with the International Monetary Fund to restructure a US$45-billion loan and eke out an agreement that could include fresh funding. The administration had said it wants a deal signed by May. But six months into the talks, little progress has been made, and Fernández recently said he’s in no rush to get an accord.
Midterm congressional elections in October only further cloud the outlook. Investors worry that the government will be hesitant to agree to unpopular fiscal austerity measures that would have to form part of any deal.
That bond prices are dropping even amid a surge in prices for soybeans, the country’s biggest export, shows just how pessimistic investors are on the outlook for South America’s second-largest economy, which contracted about 10 percent in 2020. They’re focused on an inflation rate projected to reach 50 percent, double-digit unemployment and a fiscal deficit that ballooned last year to its widest since at least 1993.
Argentina defaulted in May for the ninth time in its 200-year history. With air travel shut down amid the pandemic, government officials and creditors hashed out details of the restructuring via Zoom calls. The deal gave Argentina about US$38 billion in debt relief over the next 10 years, delayed principal payments until 2024 and cut initial interest rates to as low as 0.125 percent.
Still, the new bonds have done nothing but fall since they began trading in September, losing 33 percent of their value and leading Morgan Stanley to dub it the worst rout in the aftermath of a debt restructuring in at least 20 years. One group of creditors blasted the country’s debt markets as “a virtual wasteland.”
At the root of investors’ pessimism is out-of-control spending with no realistic plans to rein it in. Argentina’s money supply exploded last year when it ran the printing presses to fund pandemic aid. Monetary growth has slowed, but foreign-currency controls are restricting access to dollars, forcing companies to restructure debts.
Armando Armenta, an emerging-markets strategist at AllianceBernstein, says prices show that bond investors are underestimating the government’s ability to improve fiscal and external accounts even without an IMF deal.
“The macro and financial instability of delaying the agreement can also be politically costly for the government ahead of the election,” Armenta said. AllianceBernestein holds Argentina bonds and took part in the recent restructuring talks.
That’s a minority view, though. Robert Koenigsberger, chief investment officer at Gramercy Fund Management and a long-time Argentine bondholder, captures the consensus sentiment when he frets about the government running out of time to cinch a deal. Amid the pandemic, the IMF is showing signs of being more lenient in its demands for fiscal austerity, Koenigsberger said, but that good will won’t last long.
“Argentina has to be careful to not miss this opportunity,” he said.
by Scott Squires & Jorgelina do Rosario, Bloomberg